Экзамен зачет учебный год 2023 / Class_8

value of the corporation, but it is hard to see how the latter should be easier to ascertain than the former.

Admittedly, valuation problems of this type cannot be entirely avoided even under existing law. In the context of a merger, appraisal proceedings require the court to determine the fair value of shares.170 Moreover, Delaware’s rules on self-dealing require courts to assess the fairness of individual transactions.171 Accordingly, in a merger agreement where the corporation’s shares are the object of the transaction, courts are forced to assess the value of these shares.172 Yet mergers and other fundamental transactions, while they attract many of the headlines and hold much of the attention of corporate law scholars, are exceptional events in the life of a corporation. Many other sizable contracts concluded by corporations, such as contracts with suppliers over parts or licensing agreements, are much easier to evaluate.

In other words, it may be true that the valuation problems caused by court-based alternatives to the transaction-centered approach are not entirely new. However, if the courts had to evaluate the impact of the controller every time a transaction between the corporation and the controller is challenged, the valuation problems that now arise only in a limited set of circumstances would become much more pervasive. It is hard to argue, therefore, that court-based alternatives to the transaction-centered approach would be practicable, let alone efficient.

VII. THE EQUAL OPPORTUNITY RULE AND RELATED APPROACHES

Valuation problems of the type described above are avoided if—as I suggest in this Article—minority shareholders are protected via a right to expel the controller. However, there are two other plausible ways of protecting minority shareholders that also avoid the valuation problems inherent in court-based solutions.

A. The Equal Opportunity Rule

One of them is the so-called equal opportunity rule.173 This rule concerns the acquisition of a controlling stake, and it comes in two flavors.174 In one version, the acquirer of a controlling stake is required to purchase shares pro rata from all those shareholders willing to sell their shares.175 The other version goes even further in that an investor who acquires a controlling stake has to offer to buy all the remaining shares at the same price paid to the seller of control.176 While Delaware law has not adopted either

170.DEL. CODE ANN. tit. 8, § 262(h) (2007).

171.Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997).

172. See, e.g., Rosenblatt v. Getty Oil Co., 493 A.2d 929, 937 (Del. 1985) (noting the necessity to examine the fairness of the price to be paid to minority shareholders in a stock-for-stock merger).

173.On the equal opportunity rule, see generally Bebchuk, Efficient and Inefficient Sales, supra note 68, at 968–73; Marcel Kahan, Sales of Corporate Control, 9 J.L. ECON. & ORG. 368, 372–78 (1993) (using the term “tender offer rule”).

174.See, e.g., Bebchuk, Efficient and Inefficient Sales, supra note 68, at 968.

175.Id.

176.Id. This, in essence, is the solution that European Community law has adopted: Art. 5(1) of the Council Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids, Council Directive 2004/25, art. 5(1), 2004 O.J. (L 142) 12, 17 (EC), imposes a duty on the acquirer of control to make a mandatory bid for all the outstanding shares of the target corporation. The minimum price for

version of the equal opportunity rule, federal law imposes the pro rata version in those cases where a controlling stake is acquired via a tender offer.177

At least in theory, both versions of the equal opportunity rule ensure that transfers of control do not harm minority shareholders.178 Unfortunately, they also share a severe limitation in that they deter at least some efficient transfers of control.179

Just as importantly, the equal opportunity rule fails to offer any protection to the minority shareholders once a controlling stake has been created. Hence, the equal opportunity rule does not offer the controller any incentive to abstain from exploiting the minority shareholders once he has acquired control. Accordingly, the equal opportunity rule cannot serve as a bonding device that would allow the acquirer to commit himself to future conduct that does not exploit the minority shareholders. In other words, the equal opportunity rule can only prevent transfers of control that are undesirable in light of the existing restrictions on the conduct of controllers. However, it cannot, per se, capture the benefits that would arise from imposing more effective restrictions on existing controllers and thereby make control desirable in a broader number of cases.180

B. Mandatory Bid Rules that Do Not Offer an Equal Opportunity

To reduce the risk that efficient control transfers are deterred, one can force the acquirer of control to offer to buy the minority shares, but allow him to pay a price that is lower than the price that he paid in acquiring the controlling stake. For example, one could provide that controlling shareholders only have to offer to buy the minority shareholders’ shares at the no-transaction value. However, even setting aside the valuation problems that such a rule may engender,181 this approach still threatens to deter

the mandatory bid is “the highest price paid for the same securities” by the acquirer “over a period, to be determined by Member States, of not less than six months and not more than 12 before the [mandatory] bid . . . .” Id.

177. Cf. 17 C.F.R. § 240.14d-10(a) (2007). This section provides that no tender offer shall be made unless:

[The] tender offer is open to all security holders of the class of securities subject to the tender offer; and . . . [t]he consideration paid to any security holder for securities tendered in the tender offer is the highest consideration paid to any other security holder for securities tendered in the tender offer.

Id.

178. E.g., Bebchuk, Efficient and Inefficient Sales, supra note 68, at 971 (concluding that under the equal opportunity rule, if a transfer takes place, minority shareholders will always be made better off by it).

179. E.g., id. at 971–72.

180.The fact that the minority shareholders may have been aware of the risk that the controller will become undesirable does not make the lack of adequate post-acquisition protection efficient. If the shareholders have taken into account the risk that the controller will become undesirable, but have chosen not to make use of the protection of the equal opportunity rule, this simply means that, ex ante, the shareholders expected the controller’s presence to benefit them. However, this does not preclude the possibility that additional benefits are created where the law offers better post-acquisition protection to the minority shareholders.

181.One might be tempted to look to the pre-acquisition share price. However, it should be noted that controlling stakes can be created gradually. Accordingly, even if the law defines a certain threshold, the crossing of which prompts the duty to make a mandatory bid, the price that the shares were traded at before the threshold was reached may not reflect the no-control value, because the acquirer may only have had slightly less control before crossing the threshold than after crossing it. To avoid valuation problems of this type, those mandatory bid rules, which do not force the acquirer to pay the same price to the minority shareholders that he paid for the control block, typically resort to formulas in calculating the bid price. Cf. Paul Davies & Klaus

some efficient control transfers in that the acquirer risks having to buy more shares than he otherwise would, increasing the amount of capital needed for the transaction.182 And, more importantly, such a rule still would not offer any protection to minority shareholders once a controller has emerged.

In sum, both the equal opportunity rule and those mandatory bid rules that do not give minority shareholders an equal opportunity to sell their shares have significant limitations.

VIII. CORPORATE OSTRACISM

How can the challenge that controlling shareholders present be solved without running into the disadvantages that the various above described approaches have? The key, in my view, is to grant minority shareholders the right to expel the controller, a mechanism I shall refer to as “ostracism.” Ostracism would allow the minority shareholders to rid the corporation of controllers whose presence the minority shareholders believe to be harmful to the corporation.

Moreover, in light of the protection that ostracism affords to shareholders, the law can and should turn existing transaction-centered protections into default rules. This would create a way for benign controllers to reap most of the benefits that their presence bestows on the corporation, thereby essentially eliminating the free rider problem.

In this Part of the Article, I focus solely on the first component of the proposed regime, namely, the right to ostracize the controlling shareholder. The second component, namely, the right to opt out of the transaction-centered protections, will be discussed in the next Part. Needless to say, if one seeks to address all shortcomings of the present legal framework, both components of the proposed regime need to be adopted. Nonetheless, it is useful to focus on ostracism first. This is because even a reform that merely adds to the current system a default rule allowing the minority shareholders to ostracize controllers would be preferable to the status quo.

A. The Basic Structure

How would corporate ostracism function in technical terms? There are various ways to implement such an approach. One plausible solution is to opt for a two-step process. At every shareholder meeting of a controlled corporation, a vote would be taken on whether or not to initiate proceedings against the controlling shareholder. If a certain percentage—e.g. 10%—of the outstanding minority shareholders vote in favor, then the board will have to call a special shareholder meeting at which the minority shareholders can vote on whether or not to expel the controller. If, at that special shareholder meeting, a simple majority of the minority shares is voted in favor of ostracizing the controller, the ostracism succeeds. In that case, the controller automatically loses the right to exercise

Hopt, Control Transactions, in THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL

APPROACH 157, 180–81 (2004) (describing mandatory bid rules in various countries); Henry T. C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. CAL. L. REV. 811, 839 (2006) (noting that “[i]n many countries, a shareholder who exceeds a threshold percentage of share ownership must offer to buy all remaining shares at a formula price”).

182. Cf. Davies & Hopt, supra note 181, at 180 (noting that prohibition of partial bids that forms the focus of a mandatory bid rule makes control transactions more expensive for potential bidders).

any voting rights or to participate in the control of the corporation in any other way. He does not lose his ownership stake automatically, but is under an obligation to sell his shares within a given time frame, say two years. Further, the controller is prohibited from reacquiring any shares in the corporation within the next ten years.

As will be explained in more detail below, the right to ostracize controllers should constitute the default under state law for firms that go public. Corporations should be able to opt out of that default via a provision in their certificate of incorporation. However, once the corporation has issued shares, any opt out via a charter amendment should require the approval of the minority shareholders.

B. Potential Benefits

Even if it is not combined with the right to opt out of the transaction-centered protections that existing law imposes, corporate ostracism offers two major benefits. First, it provides powerful protection against the excessive extraction of private benefits. Second, it protects the minority shareholders against those undesirable controllers whose presence is motivated by independently created private benefits, rather than by extracted private benefits.

1. Excessive Private Benefit Extraction

The protection against excessive benefit extraction is a fairly obvious advantage. As explained above, the upper limit of desirable benefit extraction is equal to the net benefits that the controller’s presence bestows on the corporation.183 In other words, a controller should not be allowed to extract private benefits in excess of that amount.184 The transaction-centered approach is insufficient to enforce this limit.185 By contrast, corporate ostracism provides a mechanism to solve the problem at hand. This is because the upper limit of desirable benefit extraction coincides with the point at which shareholders have an incentive to ostracize the controller. As soon as the controller starts extracting benefits in excess of the net benefits that his presence creates for the corporation, the other shareholders have every reason to ostracize him. Knowing that, controllers are unlikely to extract excessive private benefits in the first place.

2. Other Undesirable Controllers

The second benefit of corporate ostracism is equally obvious. As laid out in detail above, the transaction-centered approach fails to protect the minority shareholders in those cases where the presence of a burdensome controller is motivated by independently created private benefits, rather than by extracted private benefits.186 Corporate ostracism, by contrast, allows the minority shareholders to rid the corporation of undesirable controllers, regardless of whether extracted or independently created private benefits are the reason for the controller’s presence.

At this point, it is helpful to consider a possible criticism. At first glance, corporate

183. See supra Part III.B.1.

184. See supra Part III.B.1.

185. See supra Part III.C.1.

186. See supra Part V (“Undesirable Control Without Benefit Extraction”).

ostracism may seem to create a problem of its own when it comes to controllers whose presence is motivated by independently created private benefits. One might be tempted to argue that corporate ostracism is bound to lead to inefficient outcomes where, even in the absence of extracted private benefits, the independently created private benefits exceed the (shared and private) costs of control. For example, assume that the controller’s presence imposes net costs on the corporation in the amount of $1 million annually,187 that the controller bears private costs in the amount of $100,000, and that he enjoys independently created private benefits in the amount of $1,500,000. In such a scenario, the minority shareholders have a clear incentive to ostracize the controller because the impact of his presence on the corporation is a negative one. But, one could argue, ostracizing the controller would be inefficient because the total benefits of control including the private benefits to the controller exceed the total costs of control. This said, a more careful analysis reveals this problem to be illusory. If the controller wants to continue enjoying the independently created benefits of control, then he can, and in fact should, compensate the corporation for the harm he inflicts. As long as that compensation is at least equal to the burden that the controller’s presence imposes on the corporation, the other shareholders have no reason to ostracize him. Thus, the ostracization of a desirable controller is avoided.

C. Potential Costs

Granting minority shareholders the right to ostracize the controller is not without potential costs. In particular, minority shareholders may make uninformed choices, or they may even seek to extort the controller. These and other problems should not be dismissed too easily. However, as I show in the following, they should not be exaggerated either.

1. Uninformed Choices

One potential problem with the right to expel the controlling shareholder is that the shareholders may make badly informed choices.188 That risk comes in two flavors. First, the minority shareholders may overestimate the benefits of a controller and therefore fail to ostracize an undesirable controller. Or, second, they may underestimate the benefits of a controller and, as a result, ostracize a desirable controller.

Errors of the first type do not provide an argument against giving minority shareholders a right to expel the controller.189 After all, even if they occasionally fail to use their right to ostracize an undesirable controller, that still does not leave them worse off than they are under existing law, which does not accord them such a right in the first

187.By this, I mean that the shared costs of control exceed the shared benefits of control by $1 million.

188.That small shareholders typically lack the incentive to become informed about matters on which they can vote is generally recognized. See, e.g., Lucian Arye Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1437, 1473 (1992) (noting, with respect to reincorporation decisions, that “given the extremely small likelihood of casting a decisive vote, small shareholders will rationally decline to inform themselves even if they can do so at fairly minimal cost”).

189.A different question is whether the risk at issue constitutes a persuasive reason against allowing corporations to opt out of the transaction-centered protections. That question will be addressed below. See infra Part IX.B.2.a.

place.

By contrast, the risk that the minority shareholders might expel a beneficial controller deserves closer attention. Given the size of their investments and the minimal likelihood that their individual votes will matter to the outcome of the ostracization proceeding, most small shareholders will remain rationally uninformed regarding the costs and benefits of the controlling shareholder’s presence.190 So how can one be sure that the minority shareholders do not, as a result of inadequate information, expel benign controllers?

In fact, the risk that small shareholders will, out of ignorance, vote to expel benign controllers seems limited. Small shareholders are generally aware that they are not particularly well informed. Why should they vote in favor of ostracizing the controller? Such behavior would be rational only if, as a general matter, corporations were better off without controllers. If that were the case, uninformed shareholders would indeed be likely to adopt a general policy of voting in favor of ostracizing the controller. However, that would not be troublesome. After all, if it were true that controllers more often than not harm the controlled corporation, then the occasional ostracization of a benign controller would be a small price to pay for the elimination of controllers, who, by definition, tend to reduce firm value. By contrast, if the presence of a controller tends to benefit the controlled corporation, uninformed shareholders are much more likely to vote against ostracization or abstain from voting—just as small shareholders tend to abstain or support management when it comes to most instances of corporate voting.191

2. Extortion

Another challenge involves the potential for opportunistic behavior on the part of the minority shareholders. What, one might ask, prevents the minority from abusing the mechanism of ostracism for the purpose of extortion? The underlying problem can be summed up as follows: For the controller, being ostracized will often be costly. The controller will typically have incurred considerable costs in order to amass a controlling stake in the first place. In particular, he may have paid a premium to acquire the shares. If the controller is now forced to sell the controlling stake, he may not be able find a buyer who is willing to pay a similar premium. In addition, the controller may have made considerable corporation-specific investments after acquiring his controlling stake—e.g., by spending resources to become more informed about the corporation’s business. Moreover, despite the two year period that an ostracized controller has to sell his shares,

190. The same problem exists with respect to other decisions in which the minority shareholders participate. Cf. Lucian Arye Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 HARV. L. REV. 1820, 1837 (1989) [hereinafter Bebchuk, Limiting Contractual Freedom].

Any shareholder holding a small stake in the company recognizes that his vote is highly unlikely to be pivotal. . . . Such a shareholder does not have sufficient reason to acquaint himself with [a] proposal [to amend the charter] . . . even if the cost of doing so is fairly small.

Id.

191. See, e.g., Ellen S. Friedenberg, Jaws III: The Impropriety of Shark-Repellent Amendments as a Takeover Defense, 7 DEL. J. CORP. L. 32, 77 (1982) (“Under normal conditions, the average shareholder in a publicly held corporation will fail to vote or will automatically return a proxy favoring management’s position.”).

his attempts to sell his block may sometimes cause the share price to decline.192 In other words, an ostracized controller may incur significant losses.

Correspondingly, most controllers are likely to have a strong incentive to avoid being ostracized. In principle, this incentive is quite desirable. Ideally, the institution of ostracism will deter undesirable controllers, even if never exercised, because the costs of being ostracized will motivate controllers to avoid becoming burdensome to the corporation in the first place.

However, the costs of being ostracized also harbor an obvious risk in that the minority shareholders might attempt to “squeeze” the controller. For example, they might let him know that if he wishes to avoid ostracization, he will have to forego distributions that the other shareholders enjoy or enter into contracts with the controlled corporation that are highly favorable to the latter. The controller, it seems, has an incentive to comply as long as the sacrifice that the minority shareholders demand is less burdensome than being ostracized. As a result, benign controllers might fail to emerge in the first place for fear of being squeezed.

For lack of experience with corporate ostracism, the risk of extortion cannot be dismissed out of hand. However, even setting aside the free rider problem that the extortionists may face,193 two factors suggest that the risk of extortion should not be overemphasized either.

a. Extortion as a Chicken Game

As pointed out above, the desirable level of benefit extraction is defined by both a lower and an upper limit.194 As long as the controller, in extracting private benefits, remains somewhat below the upper limit of desirable benefit extraction, the minority shareholders reap part of the benefits of his control. In that case, both sides lose if the controller is ostracized.195 That, in turn, makes it difficult for the would-be extortionists to mount a credible threat. In a nutshell, given that the controller knows that the minority shareholders will hurt themselves if they ostracize him, the controller has no reason to

192.The risk of such a decline should not be exaggerated. Usually, when a large shareholder tries to sell his stake, this sends a negative signal to the market. After all, the capital market expects large shareholders to have better access to inside information than other investors. Accordingly, if one of them sells his stake, this can be seen as a sign that the firm’s future prospects do not look bright. Consequently, the selling of a large stake can have an adverse impact on the stock price because of its signaling value. Yet in the case at hand, no such signal is sent. After all, when a controller is ostracized, outside investors know that the controller does not leave of his own free will. In fact, the expulsion of a controller should often be read as a positive signal since it carries the promise that the corporation will no longer be burdened with the presence of an undesirable controller.

193.In order to camouflage the extortionist nature of their demands, the extortionist shareholders are likely to demand that the wealth transfer be made to the corporation rather than to themselves personally. That, of course, means that those minority shareholders who have mounted the effort to extort the controller reap only a fraction of the fruits that their efforts yield. At the same time, they bear the costs of extorting the controller alone. These costs particularly include the costs of coordinating a sufficient number of minority shareholders.

194.See supra Part III.B.

195.Of course, the minority shareholders could hope that another, equally desirable controller will take the old controller’s place. Yet once the minority shareholders have resorted to squeezing the controller, other potential controllers will be reluctant to acquire a controlling stake in the relevant corporation for fear that they will meet the same fate.

believe that they will carry out their threat.196

The situation at hand represents what is conventionally referred to as a “chicken game”197 or a “hawk-dove game.”198 In such a game, each party is better off if the other

backs down.199 At the same time, each party knows that she will suffer more if the threat is carried out than if she simply backs down.200 One way to win such a game is for party

A to signal a credible commitment to party B that she (party A) will not back down.201 Once party B has received that signal, she knows that she only has the choice between backing down and seeing the threat carried out. Because party B prefers giving in to seeing the threat carried out, she will rationally choose to back down.

Against the above described background, the controller can win the conflict if he can signal a credible commitment not to give in before the minority shareholders can make their final decision whether or not to ostracize him. And the law can do its part to secure such an outcome, namely, by adopting a rule according to which the resolution ostracizing the controller is both irreversible and unconditional. Against the background of such a rule, the controller can refuse to give in to any demands made by the minority shareholders and can decline to attend the special meeting at which he is to be ostracized. Once the moment of the vote arrives, the controller’s refusal becomes a credible commitment because, at that moment, it is no longer feasible for him to make any concessions. Hence, at the moment of the vote, the minority shareholders are left with only two choices. They can ostracize the controller and lose their portion of the benefits that the controller’s presence bestows on the corporation, or they can vote against ostracizing the controller and thereby retain the relevant benefits. Rationally, they will vote in the latter way.

Admittedly, the minority shareholders could attempt to commit themselves even earlier. In particular, they could enter into an agreement among themselves to ostracize the controller unless he complies with their demands. However, complementing the rule that declares the ostracism resolution to be unconditional and irreversible, the law can declare agreements of the type at issue to be non-binding, thereby undermining their value as commitment devices. Moreover, assuming the existence of a legal ban on precommitments, it is not obvious that there are other commitment devices that are visible enough to allow the commitment to be signaled to the controller, while at the same time being sufficiently invisible to be safe from judicial scrutiny.

196. One may be tempted to point to the phenomenon of greenmail—target corporations paying off hostile bidders to avoid being acquired—as evidence for the feasibility of the extortion scenario. However, greenmail was popular precisely because greenmailers were able to credibly threaten a hostile takeover. See, e.g., Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 U. PA. L. REV. 1, 32 (1987) (noting that the “proliferation of junk bonds increases the danger of greenmail because easy access to financing allows almost any raider to mount a credible threat”).

197. E.g., Richard H. McAdams, A Focal Point Theory of Expressive Law, 86 VA. L. REV. 1649, 1674 (2000); Robert Sudgen, Spontaneous Order, J. ECON. PERSP., Fall 1989, at 85, 87.

198. E.g., McAdams, supra note 197, at 1674; Sudgen, supra note 197, at 87. 199. E.g., McAdams, supra note 197, at 1675.

200.E.g., id.

201.THOMAS C. SCHELLING, THE STRATEGY OF CONFLICT 126–27 (1960).

b. Excessive Demands

The extortion scenario also runs into a second problem: From the controller’s perspective, it may be preferable to undertake the wealth transfer demanded by the minority shareholders rather than to be ostracized and bear the even higher costs that come with the duty to sell his shares. However, even if the sacrifice that is demanded is less burdensome than being ostracized, the controller knows that if he gives in to the minority shareholders’ demands, the extortion scenario can repeat itself every year.

In other words, from the controller’s perspective, the choice in any given year is not one between making a one-time sacrifice on the one hand and incurring the risk of being ostracized on the other hand. Rather, the choice is between making potentially unlimited sacrifices in the future versus incurring the risk of being ostracized. Therefore, giving in to extortive demands is a much less attractive option than it may seem at first glance. Even controllers who see a certain risk of being ostracized if they do not give in to extortive demands may not find it in their interest to pay.

As a result, would-be extortionists do not only have to find a way to commit themselves to ostracizing the controller in case he does not comply with their demands. Rather, they also need to make a credible commitment that neither they nor other minority shareholders will demand further wealth transfers in the following years. It is not clear how this can be achieved if the law declares agreements to this effect to be invalid. In sum, while the risk of extortion should not be dismissed too easily, it should not be exaggerated either.

3. Conflicts of Interest

One may further be concerned that benign controllers could be ostracized because a large minority shareholder hopes to gain control of the corporation or simply because he hopes to acquire the controller’s stake on the cheap. However, this risk does not seem enormous. Even if a controller is ostracized, this does not mean that the next largest minority shareholder—or any other minority shareholder for that matter—will gain control. Rather, it is the person or entity that the controller sells his stake to that will be the next controller.

Similarly, the danger that the controller is ostracized because a minority shareholder is trying to acquire the controller’s stake at a price below the true value seems limited. The two-year period that the controller has to sell his stake should usually suffice to prevent a situation where the ostracized controller cannot line up any buyers for his stake other than the next largest minority shareholder.

4. Minimal Shareholdings

A final problem arises in those cases where the total number of outstanding shares held by minority shareholders is completely insignificant relative to the number of shares held by the controller. For example, the controller may own 99.8% of a publicly traded corporation. In cases like this, the outcome of a corporate ostracism may well become unpredictable because a decision by such a small voter population may be influenced by other factors besides economic rationality Therefore, the right to ostracize the controller should only be available in those cases where the minority’s percentage of shares is sufficiently high. One plausible option is to deny the minority shareholders the right to